Driving Components in Prime Vendor Agreements

Deciding whether a “prime vendor contract” is a wise choice in your purchasing process is something that confronts many operators today.

By definition, a “prime vendor contract” is a pricing mechanism that distributors offer to operators for the items they frequently buy. Generally, the distributor seeks to obtain a high percentage of the operator’s purchasing power, in exchange for better or preferred pricing for key menu items. Like any contract, a prime vendor contract is a mutual agreement that is intended to benefit both parties.

Prime vendor contract pricing is formulated on the following criteria:

• Cost-Plus pricing – (also called “fixed price”) which is cost of the product plus a flat markup for items that tend to be market stable such as canned, frozen and dry goods for the duration of the contract

• Cost-Percentage pricing – which is cost of the product plus a percentage used for high volume products that are prone to volatile market conditions such as produce, dairy, meat and seafood

• Cost Pricing – which is when the distributor is willing to sell you items at cost.

• Market Pricing – Used on items that tend to fluctuate heavily throughout the year, such as produce, seafood, meats, and dairy

When negotiating a prime vendor contract, an operator needs to be aware of the conditions that apply to the distributor in order to get the product to the establishment. Distributors face challenges in delivering product that are out of their control, such as weather, fuel costs, road conditions and routing changes. Any part of these components can affect the costs of the products, delivery dates or times, or possibly the amount of product that can be delivered.

On the other hand, distributors should always have a good understanding of the nature of the establishments they serve. Restaurateurs are always concerned about quality, freshness, prices and availability of their products, but most importantly distributors should always understand that service is paramount to retaining their customers’ satisfaction.

Negotiating a prime vendor agreement should be based upon the service aspects of the agreement. The most important elements of the service component are:

• Terms of payment and / or credit lines

• Ability to communicate with sales representative and when

• Understanding of unit weights and measures of the products being ordered

• Ability to resolve errors in the orders

Deciding whether a prime vendor agreement is the right choice for your establishment, will depend on the nature of your restaurant, the menu, and the purchasing habits of the decision-maker. If your operation is small, seasonal, or ethnic (i.e. Mexican, Italian, Greek or Chinese), a prime vendor agreement may be something to reconsider. Operations of these types often use small quantities of product, or they need larger amounts of specialty foods to meet their menu demands. Because prime vendor contracts are typically offered by larger, broadline distributors such as Sysco or U.S. Foods, specialty food items may be special order items and not ordinarily stocked in their warehousing facilities.

If you decide on a prime vendor contract for your establishment, determine whether or not the following conditions apply with the distributor you choose to do business with:

Financial rewards or “kickbacks” to the person in charge of purchasing: If the person placing the orders is getting financial rewards for buying key items, rather than expected items, your prime costs may increase.

Degree of labor and time investment shopping for products: Always communicate and interact with the sales representative. Eliminating affective communication in lieu of saving time placing orders can be a big mistake. Operators have a right to be analytical and carefully audit their invoices – utilize this option in your contract!

Length of the contract: Always pay attention to the costs of items over time. If cost + plus pricing is prominently negotiated in the contract, those items should not change in price over the duration of the contract. If cost + percentage or market pricing is prominently negotiated in your contract, always ask the distributor when these prices are most vulnerable during the year, and plan your menu accordingly.

In summary, the prime vendor agreement is intended to be an equitable arrangement between the operator and the vendor. With great emphasis, the relationship between the vendor and the operator must be mutually respectful and expected to benefit both parties over a length of time. Like any marriage, both sides have a job to do, and both seek profitable results over the length of the contract. Weighing all the options pointed out in this article will allow you to make wise and informed decisions on your purchasing habits.

By Eric Hahn, Founder and Research Developer for RestaurantEdge.com

Eric Hahn is the Founder and Research Developer for RestaurantEdge.com. Hahn is a 25-year industry veteran with a diverse background in the restaurant business and skilled legal research development. RestaurantEdge.com produces a free monthly newsletter that provides insight to changes in the restaurant industry.